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  2. 2. CORPORATE PROFILE WESCO International, Inc. (NYSE: WCC) is a leading distributor of electrical construction products and electrical and industrial maintenance, repair and operating (MRO) supplies, and is the nation’s largest provider of integrated supply services. Headquartered in Pittsburgh, Pennsylvania, the company employs approximately 5,400 people, maintains relationships with 24,000 suppliers, and serves more than 100,000 customers worldwide. Major markets include commercial and industrial firms, contractors, governmental agencies, educational institutions, telecommunications businesses and utilities. WESCO operates five fully automated distribution centers and over 350 full-service branches in North America and selected international markets, providing a local presence for area customers and a global network to serve multi-location businesses and multi-national corporations. TAKING
  3. 3. CTION /1
  4. 4. TO OUR SHAREHOLDERS, EMPLOYEES AND FRIENDS WESCO is a leading wholesaler and distributor of electrical and industrial products. We operate in large markets with a long history of consistent growth that exceeds the long-term growth rates for Gross Domestic Product. Even in periods of general economic weakness the aggregate market for electrical equipment and supplies has been resilient due to continued expansion in the use of automated processes, enhanced power systems, security devices, home and workplace lighting, and an ever-increasing array of electrical and electronic equipment. Although it has experienced occasional, temporary declines tied to general economic weakness, our industry continues to have long-term positive characteristics. The current economic conditions are unusual. For the first time in more than two decades, industry sales of electrical equipment and supplies have had two consecutive years of declining volume. Weak industrial markets, a decline in industrial and facilities capital expenditures and a sharp drop in non-residential construction projects have adversely affected most of WESCO’s markets. Because the overall market demand for WESCO’s products and services had been depressed throughout 2002, our sales declined by 9%. In spite of this market weakness, we are confident that the long-term prospects for our industry are good and that recovery is inevitable. Accordingly, we have been emphasizing operational performance improvements that better position WESCO for successful and profitable operations today and for growth and improved performance when the economy rebounds. RESPONDING TO CHALLENGES 2/ WESCO INTERNATIONAL, INC. 2002 Annual Report
  6. 6. FOR GROWTH POSITIONING LETTER TO OUR SHAREHOLDERS continued Premier Customers WESCO has developed an operations style and customer service standard that is often referred to as our “extra effort” approach. Whether customers are large or small, national in scope or highly localized, industrially or commercially oriented, WESCO provides service that is matched to their requirements. The value of WESCO’s service model is confirmed every year by our ability to add premier companies from a wide range of industries to our large and growing customer base. The large companies that select WESCO as their preferred supplier for national accounts, integrated supply or alliance programs typically have some sizeable facilities as well as a few smaller or remote operations. WESCO routinely demonstrates that we can provide exceptional local service while also meeting the sophisticated and highly diverse systems and reporting needs of corporate customers. We were again successful throughout 2002 in winning preferred supplier arrangements with large, well-known, multi-location customers. This sales success with premier organizations gives us confidence that we are gaining market share and laying the groundwork for future growth. Productivity The investments we’ve made in marketing and operations management during this unusually long economic downturn have positioned us for steady growth as the economy recovers. We’ve been able to protect our margins and reduce operating costs during this period of intense competition for new or retained 4/ WESCO INTERNATIONAL, INC. 2002 Annual Report
  9. 9. LETTER TO OUR SHAREHOLDERS continued business. Investments made in systems, processes and controls are producing outstanding information for use in product marketing, service level management, pricing, purchasing and strident control of operating costs. We have managed for profitability, generating positive cash flow and strengthening our balance sheet. 2002 Operating Results Total sales revenue in 2002 was $3.33 billion, a 9.1% reduction from prior year levels. Operating income as a percent of sales declined to 2.3% from 2.6% in 2001. Net income increased 14.3% to $23.1 million, as a result of lower interest expense and a lower tax rate. Earnings per share were $0.49, compared to $0.43 in 2001. Capital Structure WESCO’s balance sheet and financial liquidity position were improved considerably during 2002. We strengthened working capital positions, and arranged a new, five-year, $290 million asset backed revolving credit facility in March. WESCO has no significant debt repayment obligations until 2007. As of year-end, ready funding availability under our revolving credit facility was $154 million. We made further improvements to our capital structure in early 2003 with the completion of a $51 million, 10-year term real estate financing. /7 WESCO INTERNATIONAL, INC. 2002 Annual Report
  10. 10. Corporate Governance In December, Ms. Sandra Beach Lin and Mr. William Vareschi were elected to the Board, bringing the total to ten. Ms. Beach Lin is president of Alcoa’s Closure Systems International Division and had previously served as an operating executive with Allied Signal, Smith & Nephew Perry, Crest Ultrasonics and American Cyanamid. Mr. Vareschi is the chief executive officer of Central Parking Corporation and a former long-term executive of General Electric. WESCO’s management team and its Board of Directors are fully committed to the highest standards of corporate governance, business conduct and financial reporting. During the year, management and the Board spent considerable time reviewing, validating and updating our governance procedures and compliance processes. Outlook WESCO’s management is determined to re-establish a pattern of sales and earnings growth. We have expanded our marketing activities at both local market and national levels, completed company-wide sales training, and added major new product lines and services. Since we do not anticipate significant near-term improvement in the general economic climate, we are maintaining a relentless focus on operational productivity. We fully intend to protect and improve on our low-cost position, and we are piloting productivity improvement concepts borrowed from leading industrial firms to drive savings in operations and working capital. We thank our customers, employees, supplier partners and shareholders for their efforts and support during these challenging times. Roy W. Haley Chairman and Chief Executive Officer FINANCIAL HIGHLIGHTS Year Ended December 31 2002 2001 2000 (in millions) Net sales $ 3,325.8 $ 3,658.0 $ 3,881.1 Gross profit 590.8 643.5 684.1 Income from operations 76.6 95.3 125.4 Interest and other expenses 50.7 62.0 68.7 Net income 23.1 20.2 33.4 EBITDA 1 96.4 126.4 158.4 Working capital 178.6 188.6 229.8 Long-term debt (including current portion) 418.0 452.0 483.3 Stockholders’ equity 169.3 144.7 125.0 1 Income from operations plus depreciation, amortization, and non-cash restructuring and non-cash recapitalization costs (see page 22). 8/ WESCO INTERNATIONAL, INC. 2002 Annual Report
  11. 11. United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-14989 WESCO INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 25-1723342 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 West Station Square Drive 15219 Suite 700 (Zip Code) Pittsburgh, Pennsylvania (Address of principal executive offices) (412) 454-2200 (Registrant’s telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Class Name of Exchange on which registered Common Stock, par value $.01 per share New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ X ] No [ ] The registrant estimates that the aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $114.5 million based on the June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, closing price on the New York Stock Exchange for such stock. As of February 28, 2003, 40,455,493 shares of Common Stock, par value $.01 per share (“Common Stock”) and 4,653,131 shares of Class B Common Stock, par value $.01 per share (“Class B Common Stock”) of the registrant were outstanding. Documents Incorporated by Reference: Part III of this Form 10-K incorporates by reference portions of the registrant’s Proxy Statement for its 2003 Annual Meeting of Stockholders. /9
  12. 12. TABLE OF CONTENTS Part I ITEM 1 / Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ITEM 2 / Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 3 / Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 4 / Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Part II ITEM 5 / Market for Registrant’s Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 21 ITEM 6 / Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ITEM 7 / Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 23 ITEM 7a / Quantitative and Qualitative Disclosures About Market Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ITEM 8 / Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ITEM / 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . . . . 54 Part III ITEM 10 / Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ITEM 11 / Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ITEM 12 / Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ITEM 13 / Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ITEM 14 / Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Part IV ITEM 15 / Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Signatures and Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 10 / WESCO INTERNATIONAL, INC. 2002 Form 10-K
  13. 13. PART I ITEM 1 / are increasingly demanding that distributors provide a broader and more complex package of services as they seek to outsource non-core functions and achieve BUSINESS. documented cost savings in purchasing, inventory and supply chain management. In this Annual Report on Form 10-K, “WESCO” refers to WESCO International, Inc., and its subsidiaries and Electrical Distribution. The U.S. electrical distribution its predecessors unless the context otherwise requires. industry had sales of approximately $72 billion in 2002. References to “we,” “us,” “our” and the “Company” While overall weakness in the current economic refer to WESCO and its subsidiaries. Our subsidiaries environment has contributed to recent industry sales include WESCO Distribution, Inc. (“WESCO Distribution”) decline of approximately $2 billion since 2000, industry and WESCO Distribution Canada, Inc. (“WESCO growth has averaged 5% per year from 1985 to 2002. Canada”), both of which are wholly-owned by WESCO. This expansion has been driven by general economic growth, increased use of electrical products in businesses THE COMPANY and industries, new products and technologies, and customers who are seeking to more efficiently purchase With sales of approximately $3.3 billion in 2002, we a broad range of products and services from a single are a leading North American provider of electrical point of contact, thereby eliminating the costs and construction products and electrical and industrial expenses of purchasing directly from manufacturers or maintenance, repair and operating supplies, commonly multiple sources. The U.S. electrical distribution industry referred to as “MRO.” We are the second largest is highly fragmented. The four national distributors, distributor in the estimated $72 billion U.S. electrical including WESCO, account for approximately 19% of distribution industry, and the largest provider of estimated total industry sales. integrated supply services. Our integrated supply solutions and outsourcing services are designed to Integrated Supply. The market for integrated supply fulfill a customer’s industrial MRO procurement needs services has more than doubled from $5 billion in 1997 through a highly automated, proprietary electronic to over $12 billion in 2001, an increase of 25% per year. procurement and inventory replenishment system. Recent projections estimate that the integrated supply This allows our customers to consolidate suppliers market will reach $26 billion by 2005. Growth is being and reduce their procurement and operating costs. We driven by the desire of large industrial companies to have over 350 branches and five distribution centers reduce operating expenses by implementing compre- located in 48 states, nine Canadian provinces, Puerto hensive third-party programs, which outsource the Rico, Mexico, Guam, the United Kingdom, Nigeria and cost-intensive procurement, stocking and administrative Singapore. We serve over 100,000 customers worldwide, functions associated with the purchase and consumption offering over 1,000,000 products from over 24,000 of MRO supplies. For our customers, these costs can suppliers. Our diverse customer base includes a wide account for over 50% of the total costs for MRO products variety of industrial companies; contractors for industrial, and services. The total potential in the United States for commercial and residential projects; utility companies; integrated supply services, measured as all purchases and commercial, institutional and governmental of industrial MRO supplies and services, is currently customers. Our leading market positions, extensive estimated to be approximately $260 billion. geographic reach, broad product and service offerings and acquisition program have enabled us to compete COMPETITIVE STRENGTHS effectively against the companies in our industry. Market Leadership. Our ability to manage large construction projects and complex multi-site plant INDUSTRY OVERVIEW maintenance programs and procurement projects that The electrical distribution industry serves customers require special sourcing, technical advice, logistical in a number of markets including the industrial, support and locally based service has enabled us to commercial, construction and utility markets. Electrical establish leadership positions in our principal markets. distributors, such as WESCO, provide logistical and We have utilized these skills to generate significant technical services for customers by bundling together revenues in industries with intensive use of electrical a wide range of products typically required for the and MRO products, including electrical contracting, construction and maintenance of electrical supply utilities, original equipment manufacturing, process networks, including wire, lighting, distribution and manufacturing and other commercial, institutional control equipment and a wide variety of electrical and governmental entities. We also have extended supplies. This distribution channel enables customers our position within these industries to expand our to efficiently access a broad range of products and has customer base. the capacity to deliver value-added services. Customers / 11
  14. 14. Value-added Services. We are a leader in providing a Our low cost position enables us to generate a significant wide range of services and procurement solutions that amount of cash flow as the capital investment required draw on our product knowledge, supply and logistics to maintain our business is low. This cash flow is expertise and systems capabilities, enabling our available for debt reduction, strategic acquisitions and customers to reduce supply chain costs and improve continued investment in the growth of the business. efficiency. These programs include: BUSINESS STRATEGY • National Accounts – we coordinate product supply and materials management activities for Our objective is to be the leading provider of electrical MRO supplies, project needs and direct material products and other MRO supplies and services to for customers with multiple locations who seek companies in North America and selected international purchasing leverage through a single electrical products provider; markets. In achieving this leadership position, our goal is to grow earnings at a faster rate than sales by focusing • Integrated Supply – we design and implement on margin enhancement and continuous productivity programs that enable our customers to significantly reduce the number of MRO suppliers they use improvement. Our growth strategy leverages our existing through services that include highly automated, strengths and focuses on developing new initiatives proprietary electronic procurement and inventory and programs. replenishment systems and on-site materials management and logistics services; and Enhance Our Leadership Position in Electrical Distribution. • Construction National Accounts – we have a We intend to leverage our extensive market presence dedicated team of experienced construction sales and brand equity in the WESCO name to further our management personnel to service the needs of the leadership position in electrical distribution. We are regional and national contractors. Top engineering and construction firms which specialize in major focusing our sales and marketing on existing industries projects such as airport expansions, power plants where we are expanding our product and service and oil and gas facilities are also a focus group. offerings as well as targeting new clients, both within industries we currently serve and in new markets Broad Product Offering. We provide our customers with which provide significant growth opportunities. Markets a broad product selection consisting of over 1,000,000 where we believe such opportunities exist include electrical, industrial and data communications products retail, education, financial services and health care. sourced from over 24,000 suppliers. Our broad product We are the second largest electrical distributor in the offering enables us to meet virtually all of a customer’s United States and, through our value-added products electrical product and other MRO requirements. and services, we believe we have become the industry leader in serving several important and growing Extensive Distribution Network. Our distribution network markets including: consists of over 350 branches and five distribution centers located in 48 states, nine Canadian provinces, • industrial customers with large, complex plant Puerto Rico, Mexico, Guam, the United Kingdom, Nigeria maintenance operations, many of which require and Singapore. This extensive network, which would a national multi-site service solution for their electrical product needs; be extremely difficult and expensive to duplicate, allows us to: • large contractors for major industrial and commercial construction projects; • maintain local sourcing of customer service, • the electric utility industry; and technical support and sales coverage; • manufacturers of factory-built homes, recreational • tailor branch products and services to local vehicles and other modular structures. customer needs; • offer multi-site distribution capabilities to large Grow National Accounts Programs. From 1994 through customers and national accounts; and 2002, revenue from our national accounts program • provide same-day deliveries. increased in excess of 10% annually. We will continue to invest in the expansion of this program. Through our Low Cost Operator. Our competitive position has been national accounts program, we coordinate electrical enhanced by our low cost position, which is based on: MRO procurement and purchasing activities primarily for large industrial and commercial companies across • extensive use of automation and technology; multiple locations. We have well-established relation- • centralization of functions such as purchasing ships with over 300 companies, providing us with a and accounting; recurring base of revenue through multi-year agreements. • strategically located distribution centers; Our objective is to continue to increase revenue • purchasing economies of scale; and generated through our national accounts program by: • incentive programs that increase productivity and encourage entrepreneurship. 12 / WESCO INTERNATIONAL, INC. 2002 Form 10-K
  15. 15. • offering existing national account customers Gain Share in Key Local Markets. Significant opportunities new products and services and serving exist to gain market share in the highly fragmented additional locations; local markets. We intend to increase our market share • extending certain established national account in key geographic markets through a combination relationships to include integrated supply; and of increased sales and marketing efforts at existing • expanding our customer base by leveraging our branches, acquisitions that expand our product and existing industry expertise in markets we currently customer base and new branch openings. We intend serve as well as entering into new markets. to leverage our existing relationships with preferred suppliers to increase sales of their products in local Focus on Construction National Accounts. We are markets through various initiatives, including sales increasing our focus on large construction, renovation promotions, cooperative marketing efforts, direct and institutional projects. We seek to secure new participation by suppliers in national accounts major project contracts through: implementation, dedicated sales forces and product exclusivity. To promote growth, we have instituted • active national marketing of our demonstrated project management capabilities; a compensation system for branch managers that encourages our branch managers to increase sales • further development of relationships with and optimize business activities in their local markets, leading regional and national contractors and engineering firms; including managing the sales force, configuring inventories, targeting potential customers for • close coordination with national account customers marketing efforts and tailoring local service options. on their major project requirements; and • offering an integrated supply service approach Pursue Strategic Acquisitions. Since 1995, we have to contractors for major projects. completed and successfully integrated 25 acquisitions, which represent annual sales of approximately Extend Our Leadership Position in Integrated Supply. $1.4 billion. We believe that the highly fragmented We are the largest provider of integrated supply nature of the electrical and industrial MRO distribution services for MRO goods and services in the United industry will continue to provide us with acquisition States. We provide a full complement of outsourcing opportunities. Our most recent acquisition was completed solutions, focusing on improving the supply chain in March 2001. We have not been as active in pursuing management process for our customers’ indirect acquisition candidates given the weak economy and purchases. Our integrated supply programs replace the the uncertain future earnings streams of acquisition traditional multi-vendor, resource-intensive procurement candidates. We would expect our acquisition activities process with a single, outsourced, fully automated to increase as the economy improves. We expect that process capable of managing all MRO and related any future acquisitions will be financed out of available service requirements. Our solutions range from timely internally generated funds, additional debt and/or the product delivery to assuming full responsibility for the issuance of equity securities. However, our ability to entire procurement function. Our customers include make acquisitions will be subject to our compliance some of the largest industrial companies in the United with certain conditions under the terms of our revolving States. We intend to expand our leadership position as credit facility. See Part II, Item 7. – “Management’s the largest integrated supply service provider by: Discussion and Analysis of Financial Condition and • continuing to tailor our proven and profitable Results of Operations – Liquidity and Capital Resources” business model to the scale and scope of our for a further description of the revolving credit facility. customers’ operations; • maximizing the use of our highly automated Expand Product and Service Offerings. We continue proprietary information systems; to build on our demonstrated ability to introduce new • leveraging established relationships with our large products and services to meet existing customer industrial customer base, especially among existing demands and capitalize on new market opportunities. national account customers who could benefit In addition, we have the platform to sell integrated from our integrated supply model; and lighting control and power distribution equipment • being a low cost provider of integrated in a single package for multi-site specialty retailers, supply services. restaurant chains and department stores. These are strong growth markets where our national accounts We intend to utilize these competitive strengths to strategies and logistics infrastructure provide increase our integrated supply sales to both new significant benefits for our customers. and existing customers, including our existing national account customers. / 13
  16. 16. Leverage Our e-Commerce and Information System • Lighting – Lamps, fixtures and ballasts Capabilities. We conduct a significant amount of • Wire and Conduit – Wire, cable and metallic and business electronically. Our electronic transaction non-metallic conduit management capabilities lower costs and shorten • Control, Automation and Motors – Motor control cycle time in the supply chain process for us and devices, drives, programmable logic controllers, for our customers. We intend to continue to invest pushbuttons and operator interfaces in information technology to create more effective • Data Communications – Premise wiring, patch panels, linkages with both customers and suppliers. terminals and connectors Expand Our International Operations. Our international We purchase products from a diverse group of over sales, the majority of which are in Canada, accounted 24,000 suppliers. In 2002, our ten largest suppliers for approximately 11% of total sales in 2002. We believe accounted for approximately 33% of our purchases. that there is significant additional demand for our The largest of these was Eaton Corporation, through its products and services outside the United States and Cutler-Hammer division, accounting for approximately Canada. Many of our multinational domestic customers 13% of total purchases. No other supplier accounted are seeking distribution, integrated supply and project for more than 5% of total purchases. management solutions globally. Our approach to Our supplier relationships are important to us, providing international operations is consistent with our domestic access to a wide range of products, technical training philosophy. We follow our established customers and and sales and marketing support. We have preferred pursue business that we believe utilizes and extends our supplier agreements with approximately 179 of our existing capabilities. This strategy of working through suppliers and purchase approximately 65% of our stock well-developed customer and supplier relationships inventory pursuant to these agreements. Consistent significantly reduces risks and provides the opportunity with industry practice, most of our agreements with to establish a profitable business. We have five suppliers, including both distribution agreements and locations in Mexico headquartered in Tlalnepantla that preferred supplier agreements, are terminable by serve all of metropolitan Mexico City and the Federal either party on 60 days’ notice or less. District and the states of Mexico, Morelos and Hidalgo. We continue to pursue growth opportunities in existing Services locations such as Aberdeen, Scotland and London, In conjunction with product sales, we offer customers England, which support our sales efforts in Europe a wide range of services and procurement solutions and the former Soviet Union. We have an operation in that draw on our product and supply management Nigeria to serve West Africa and an office in Singapore expertise and systems capabilities. These services to support our sales to customers in Asia. We are include national accounts programs, integrated supply working toward forming strategic alliances in critical programs and major project programs. We are responding markets, where appropriate. to the needs of our customers, particularly those in processing and manufacturing industries. To more PRODUCTS AND SERVICES efficiently manage the MRO process on behalf of our customers, we offer a range of supply management Products services, including: Our network of branches and distribution centers stocks over 215,000 product stock keeping units (“SKUs”). • outsourcing of the entire MRO purchasing process; Each branch tailors its inventory to meet the needs of • providing technical support for manufacturing the customers in its local market, typically stocking process improvements using state-of-the-art approximately 4,000 to 8,000 SKUs. Our integrated supply automated solutions; business allows our customers to access over 1,000,000 • implementing inventory optimization programs; products for direct shipment. • participating in joint cost savings teams; Representative Products That We Sell Include: • assigning our employees as on-site support personnel; • Electrical Supplies – Fuses, terminals, connectors, • recommending energy-efficient product upgrades; and boxes, fittings, tools, lugs, tape and other • offering safety and product training for MRO supplies customer employees. • Industrial Supplies – Cutting and other tools, abrasives, filters and safety equipment • Distribution – Circuit breakers, transformers, switchboards, panelboards and busway 14 / WESCO INTERNATIONAL, INC. 2002 Form 10-K
  17. 17. National Accounts Programs. The typical national MRO products are needed to maintain and upgrade the account customer is a Fortune 500 industrial company, electrical and communications networks at all industrial a large utility or other major customer, in each case with sites. Expenditures are greatest in the heavy process multiple locations. Our national accounts programs are industries, such as food processing, pulp and paper and designed to provide customers with total supply chain petrochemical. Typically, electrical MRO is the first or cost reductions by coordinating purchasing activity for second ranked product category by purchase value for MRO supplies across multiple locations. Comprehensive total MRO requirements for an industrial site. Other MRO implementation plans establish jointly managed teams at product categories include, among others, lubricants, the local and national level to prioritize activities, identify pipe, valves and fittings, fasteners, cutting tools and key performance measures and track progress against power transmission products. objectives. We involve our preferred suppliers early in OEM customers incorporate electrical components the implementation process, where they can contribute and assemblies into their own products. OEMs typically expertise and product knowledge to accelerate program require a reliable, high volume supply of a narrow implementation and the achievement of cost savings range of electrical items. Customers in this segment and process improvements. are particularly service and price sensitive due to the Integrated Supply Programs. Our integrated supply volume and the critical nature of the product used, programs offer customers a variety of services to and they also expect value-added services such as support their objectives for improved supply chain design and technical support, just-in-time supply management. We integrate our personnel, product and electronic commerce. and distribution expertise, electronic technologies and Electrical Contractors. Sales to electrical contractors service capabilities with the customer’s own internal accounted for approximately 35% of our sales in 2002. resources to meet particular service requirements. These customers range from large contractors for major Each integrated supply program is uniquely configured industrial and commercial projects, the customer types to deliver a significant reduction in the number of MRO we principally serve, to small residential contractors, suppliers, reduce total procurement costs, improve which represent a small portion of our sales. Electrical operating controls and lower administrative expenses. products purchased by electrical sub-contractors Our solutions range from just-in-time fulfillment to typically account for approximately 40% to 50% of their assuming full responsibility for the entire procurement installed project cost, and, therefore, accurate cost function for all indirect purchases. We believe that estimates and competitive material costs are critical to customers will increasingly seek to utilize us as an a contractor’s success in obtaining profitable projects. “integrator,” responsible for selecting and managing the supply of a wide range of MRO and original equipment Utilities. Sales to utilities accounted for approximately manufacturers (“OEMs”) products. 17% of our sales in 2002. This market includes large investor-owned utilities, rural electric cooperatives Construction National Accounts. We have a construction and municipal power authorities. We provide our utility national accounts group, comprised of our most customers with power line products and an extensive experienced construction management personnel, range of supplies to meet their MRO and capital projects which focuses on serving the complex needs of North needs. Full materials management and procurement America’s largest engineering and construction firms outsourcing arrangements are also important in this and the top 50 U.S. electrical contractors on a multi- market as cost pressures and deregulation cause utility regional basis. These contractors typically specialize customers to streamline purchasing and inventory in building industrial sites, water treatment plants, control practices. airport expansions, healthcare facilities, correctional institutions and new sports stadiums. Commercial, Institutional and Governmental Customers (“CIG”). Sales to CIG customers accounted for approxi- MARKETS AND CUSTOMERS mately 6% of our sales in 2002. This fragmented market includes schools, hospitals, property management firms, We have a large base of approximately 100,000 customers retailers and government agencies of all types. Through diversified across our principal markets. One customer our WR Controls Branch, we have a platform to sell accounted for over 3% of 2002 sales and another integrated lighting control and distribution equipment customer accounted for over 2% of 2002 sales. Except in a single package for multi-site specialty retailers, for these two customers, no other customer accounted restaurant chains and department stores. for more than 2% of 2002 sales. Industrial Customers. Sales to industrial customers, which include numerous manufacturing and process industries, and OEMs accounted for approximately 42% of our sales in 2002. / 15
  18. 18. DISTRIBUTION NETWORK National Accounts. Our national accounts sales force is comprised of an experienced group of sales executives Branch Network. We have over 350 branches, of who negotiate and administer contracts, coordinate which approximately 290 are located in the United branch participation and identify sales and service States, approximately 50 are located in Canada and opportunities. National accounts managers’ efforts the remainder are located in Puerto Rico, Mexico, target specific customer industries, including automotive, Guam, the United Kingdom, Nigeria and Singapore. pulp and paper, petrochemical, steel, mining and Over the last three years, we have opened approxi- food processing. mately seven branches per year, principally to service national account customers. In addition Data Communications. Sales of premise cable, to consolidations in connection with acquisitions, connectors, hardware, network electronics and outside we occasionally close or consolidate existing plant products are generated by our general sales branch locations to improve operating efficiency. force and a dedicated group of outside and inside data communications sales representatives. They are Distribution Centers. To support our branch network, supported by a centralized customer service center we have five distribution centers located in the United and additional resources in product management, States and Canada, including facilities located near purchasing, inventory control and sales management. Pittsburgh, Pennsylvania, serving the Northeast and Midwest United States; near Reno, Nevada, serving Construction National Accounts. We have a sales the Western United States; near Memphis, Tennessee, management group, comprised of our most experienced serving the Southeast and Central United States; construction management personnel, which focuses on near Montreal, Quebec, serving Eastern and Central serving the complex needs of North America’s largest Canada; and near Vancouver, British Columbia, serving engineering and construction firms and the top regional Western Canada. and national electrical contractors. These contractors typically specialize in large, complex projects such Our distribution centers add value for our branches as building industrial sites, water treatment plants, and customers through the combination of a broad and airport expansions, healthcare facilities, correctional deep selection of inventory, on-line ordering, same day institutions and new sports stadiums. shipment and central order handling and fulfillment. Our distribution center network reduces the lead-time e-Commerce. We established our initial electronic and improves the reliability of our supply chain, giving catalog on the Internet in 1996. Since that time, we have us a distinct competitive advantage in customer service. worked with a variety of large customers to establish Additionally, the distribution centers reduce the time customized electronic catalogs for their use in internal and cost of supply chain activities through automated systems. Additionally, in 1999 we began a process of replenishment and warehouse management systems, providing electronic catalogs to multiple e-commerce and economies of scale in purchasing, inventory service providers, trade exchanges and industry specific management, administration and transportation. electronic commerce portals. Our primary e-business strategy is to serve existing customers by tailoring our catalog and Internet-based procurement applications SALES ORGANIZATION to their internal systems or through their preferred General Sales Force. Our general sales force is based technology and trading exchange partnerships. at the local branches and comprises approximately We believe that we lead our industry in rapid e- 2,100 of our employees, almost half of whom are outside implementation to customers’ procurement systems sales representatives and the remainder are inside sales and provide integrated procurement functionality personnel. Outside sales representatives are paid under using “punch-out” technology, a direct system-to- a compensation structure which is primarily weighted system link with our customers. towards commissions. They are responsible for making direct customer calls, performing on-site technical We continue to enhance “WESCOExpress,” a direct support, generating new customer relations and ship fulfillment operation responsible for supporting developing existing territories. The inside sales force smaller customers and select national account locations. is a key point of contact for responding to routine Customers can order over 65,000 electrical and data customer inquiries such as price and availability communications products stocked in our warehouses requests and for entering and tracking orders. through a centralized customer service center or over the Internet on We use a proactive telesales approach utilizing catalogs, direct mail, e-mail and personal phone selling to provide a high level of customer service. A new 2003-2004 Buyer’s Guide is in production and scheduled for release in the third quarter of 2003. 16 / WESCO INTERNATIONAL, INC. 2002 Form 10-K
  19. 19. INTERNATIONAL OPERATIONS We routinely process customer orders, shipping notices, suppliers’ purchase orders, and funds transfer via EDI To serve the Canadian market, we operate a network transactions with our trading partners. Our e-commerce of approximately 50 branches in nine provinces. Branch strategy calls for more effective linkages to both operations are supported by two distribution centers customers and suppliers through greater use of located near Montreal and Vancouver. With sales of technological advances, including Internet and approximately US$300 million, Canada represented electronic catalogs, enhanced EDI and other 9.0% of our total sales in 2002. The Canadian market for innovative improvements. electrical distribution is considerably smaller than the U.S. market, with roughly US$2.7 billion in total sales Our integrated supply services are supported by our in 2002, according to industry sources. proprietary procurement and inventory management systems. These systems provide a fully integrated, We also have five locations in Mexico headquartered flexible supply chain platform that currently handles in Tlalnepantla, that serve all of metropolitan over 95% of our integrated supply customers’ Mexico City and the Federal District and the states transactions electronically. Our configuration options of Mexico, Morelos and Hidalgo. for a customer range from on-line linkages to the customer’s business and purchasing systems, to We sell internationally through domestic export sales total replacement of a customer’s procurement and offices located within North America and sales offices inventory management system for MRO supplies. in international locations. WESCO operations are in Aberdeen, Scotland and London, England to support sales efforts in Europe and the former Soviet Union. COMPETITION We have an operation in Nigeria to serve West Africa We operate in a highly competitive industry. We and an office in Singapore to support our sales to Asia. compete directly with national, regional and local All of the international locations have been established providers of electrical and other industrial MRO to primarily serve WESCO’s growing list of customers supplies. Competition is primarily focused on the local with global operations referenced under National service area, and is generally based on product line Accounts above. breadth, product availability, service capabilities and price. Another source of competition is buying groups MANAGEMENT INFORMATION SYSTEMS formed by smaller distributors to increase purchasing power and provide some cooperative marketing Our branch information system, WESNET, provides capability. While increased buying power may improve processing for a full range of our business operations, the competitive position of buying groups locally, we such as customer service, inventory and logistics believe these groups have not been able to compete management, accounting and administrative support. effectively with us for national account customers due The branch system utilizes decision support, executive to the difficulty in coordinating a diverse ownership information system analysis and retrieval capabilities group. During 1999 and 2000, numerous special purpose to provide extensive operational analysis and detailed Internet-based procurement service companies, auction income statement and balance sheet variance and trend businesses, and trade exchanges were organized. reporting at the branch level. The corporate system also Many of them targeted industrial MRO and contractor provides activity-based costing capabilities for analyzing customers of the type served by WESCO. We responded profitability by customer, sales representative and with our own e-commerce capabilities and believe that shipment type. Sales and margin trends and variances we have successfully outpaced our competitors in the can be analyzed by branch, customer, product category, deployment of electronic catalogs and Internet-based supplier or account representative. connectivity with more than 50 national customers. The WESNET system operates as a distributed network of fully functional operating units, and every branch EMPLOYEES (other than our Bruckner Integrated Supply Division and As of December 31, 2002, we had approximately 5,400 certain acquired branches) utilizes its own computer employees worldwide, of which approximately 4,700 system to support local business activities. All branch were located in the United States and approximately operations are linked through a wide area network 700 in Canada and our other international locations. Less to centralized information on inventory status in our than 5% of our employees are represented by unions. distribution centers as well as other branches and We believe our labor relations are generally good. an increasing number of on-line suppliers. Recent advances in WESNET capabilities make it possible to consolidate administrative and procurement functions, and bring systematic improvement through new pricing systems and controls. / 17
  20. 20. INTELLECTUAL PROPERTY FORWARD LOOKING INFORMATION Our trade and service marks, including “WESCO,” This Annual Report on Form 10-K contains various “the extra effort people ®,” and the running man design, “forward looking statements” within the meaning of are filed in the U.S. Patent and Trademark Office, the the Private Securities Litigation Reform Act of 1995. Canadian Trademark Office and the Mexican Instituto These statements involve certain unknown risks and de la Propriedad Industrial. uncertainties, including, among others, those contained in Item 1, “Business” and Item 7, “Management’s Discussion and Analysis of Financial Condition and ENVIRONMENTAL MATTERS Results of Operations.” When used in this Annual Our facilities and operations are subject to federal, state Report on Form 10-K, the words “anticipates,” and local laws and regulations relating to environmental “plans,” “believes,” “estimates,” “intends,” “expects,” protection and human health and safety. Some of “projects” and similar expressions may identify forward these laws and regulations may impose strict, joint looking statements, although not all forward looking and several liability on certain persons for the cost of statements contain such words. Such statements, investigation or remediation of contaminated properties. including, but not limited to, our statements regarding These persons may include former, current or future business strategy, growth strategy, productivity and owners or operators of properties, and persons who profitability enhancement, competition, new product and arranged for the disposal of hazardous substances. Our service introductions and liquidity and capital resources owned and leased real property may give rise to such are based on management’s beliefs, as well as on investigation, remediation and monitoring liabilities assumptions made by, and information currently under environmental laws. In addition, anyone disposing available to, management, and involve various risks and of certain products we distribute, such as ballasts, uncertainties, some of which are beyond our control. fluorescent lighting and batteries, must comply with Our actual results could differ materially from those environmental laws that regulate certain materials expressed in any forward looking statement made by in these products. or on our behalf. In light of these risks and uncertainties, there can be no assurance that the forward looking We believe that we are in compliance, in all material information will in fact prove to be accurate. We have respects, with applicable environmental laws. As a undertaken no obligation to publicly update or revise result, we will not make significant capital expenditures any forward looking statements, whether as a result for environmental control matters either in the current of new information, future events or otherwise. year or in the near future. RISK FACTORS AVAILABLE INFORMATION Important factors that could cause actual results to WESCO’s Internet address is differ materially from the forward looking statements WESCO makes available free of charge through its we make are described below. All forward looking website its annual report on Form 10-K, quarterly statements attributable to us or persons working on reports on Form 10-Q, current reports on Form 8-K and our behalf are expressly qualified by the following amendments to those reports filed or furnished pursuant cautionary statements: to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents Our substantial amount of debt requires substantial debt are electronically filed with the Securities and service obligations that could adversely affect our ability Exchange Commission. to fulfill our obligations and could limit our growth and impose restrictions on our business. We are and will continue to be for the foreseeable future significantly leveraged. As of December 31, 2002, we had $418.0 million of consolidated indebtedness and stockholders’ equity of $169.3 million. We and our subsidiaries may incur additional indebtedness in the future, subject to certain limitations contained in the instruments governing our indebtedness. Accordingly, we will have significant debt service obligations. These amounts exclude WESCO’s accounts receivable securitization program, through which WESCO sells 18 / WESCO INTERNATIONAL, INC. 2002 Form 10-K
  21. 21. accounts receivable to a third party conduit and Restrictive debt covenants contained in our revolving removes these receivables from its consolidated credit facility and the indenture to our senior subordi- balance sheet. See Part II, Item 7. – “Management’s nated notes may limit our ability to take certain actions. Discussion and Analysis of Financial Condition and The revolving credit facility and the indenture contain Results of Operations-Critical Accounting Policies financial and operating covenants that will limit the and Estimates.” discretion of our management with respect to certain Our debt service obligations have important business matters including, incurring additional consequences, including the following: indebtedness and paying dividends. The revolving credit facility also requires us to meet certain fixed charge • a substantial portion of cash flow from our operations tests depending on credit line availability. Our ability to will be dedicated to the payment of principal and comply with these and other provisions of the revolving interest on our indebtedness, thereby reducing the credit facility and the indenture may be affected by funds available for operations, future business opportunities and acquisitions and other purposes changes in economic or business conditions or other and increasing our vulnerability to adverse general events beyond our control. A failure to comply with the economic and industry conditions; obligations contained in the revolving credit facility or • our ability to obtain additional financing in the future the indenture could result in an event of default under may be limited; either the revolving credit facility or the indenture which could result in acceleration of the related debt and the • approximately $110 million of our indebtedness is at variable rates of interest, which will make acceleration of debt under other instruments evidencing us vulnerable to increases in interest rates; indebtedness that may contain cross-acceleration or • we are substantially more leveraged than certain cross-default provisions. If the indebtedness under the of our competitors, which might place us at revolving credit facility were to be accelerated, there a competitive disadvantage; and can be no assurance that our assets would be sufficient • we may be hindered in our ability to adjust rapidly to repay in full such indebtedness and our other to changing market conditions. indebtedness. See Part II, Item 7. – “Management’s Discussion and Analysis of Financial Condition and Our ability to make scheduled payments of the Results of Operations–Liquidity and Capital Resources.” principal of, or to pay interest on, or to refinance our indebtedness and to make scheduled payments under Downturns in the electrical distribution industry have our operating leases or to fund planned capital had in the past, and may in the future have, an adverse expenditures or finance acquisitions will depend on our effect on our sales and profitability. future performance, which to a certain extent is subject to economic, financial, competitive and other factors The electrical distribution industry is affected by beyond our control. There can be no assurance that changes in economic conditions, including national, our business will continue to generate sufficient cash regional and local slowdowns in construction and flow from operations in the future to service our debt, industrial activity, which are outside our control. Our make necessary capital expenditures or meet other operating results may also be adversely affected by cash needs. If unable to do so, we may be required to increases in interest rates that may lead to a decline refinance all or a portion of our existing debt, to sell in economic activity, particularly in the construction assets or to obtain additional financing. In addition, our market, while simultaneously resulting in higher interest Receivables Facility requires an annual renewal of its payments under the revolving credit facility. In addition, terms. The current arrangement expires on June 20, during periods of economic slowdown such as the one 2003. There can be no assurance that available funding we are currently experiencing, our credit losses could or that any sale of assets or additional financing would increase. There can be no assurance that economic be possible in amounts on terms favorable to us. slowdowns, adverse economic conditions or cyclical See Part II, Item 7. – “Management’s Discussion trends in certain customer markets will not have a and Analysis of Financial Condition and Results of material adverse effect on our operating results and Operations – Liquidity and Capital Resources.” financial condition. / 19
  22. 22. The loss of, or a substantial decrease in the availability An increase in competition could decrease of, products from any of these suppliers, or the loss sales or earnings. of key preferred supplier agreements, could have a We operate in a highly competitive industry. We material adverse effect on our business. In addition, compete directly with national, regional and local supply interruptions could arise from shortages of raw providers of electrical and other industrial MRO materials, labor disputes or weather conditions affecting supplies. Competition is primarily focused in the local products or shipments, transportation disruptions, or service area and is generally based on product line other reasons beyond our control. An interruption of breadth, product availability, service capabilities and operations at any of our five distribution centers could price. Other sources of competition are buying groups have a material adverse effect on the operations of formed by smaller distributors to increase purchasing branches served by the affected distribution center. power and provide some cooperative marketing Furthermore, we cannot be certain that particular capability. During 1999 and 2000, numerous special products or product lines will be available to us, or purpose Internet-based procurement service companies, available in quantities sufficient to meet customer auction businesses and trade exchanges were organized. demand. Such limited product access could put us Many of them targeted industrial MRO and contractor at a competitive disadvantage. customers of the type served by us. While the entrants A disruption of our information systems could increase did not have a noticeable impact on our business we expenses, decrease sales or reduce earnings. expect that new competitors could develop over time as Internet-based enterprises become more established A serious disruption of our information systems could and refine their service capabilities. have a material adverse effect on our business and results of operations. Our computer systems are an Some of our existing competitors have, and new market integral part of our business and growth strategies. We entrants may have, greater financial and marketing depend on our information systems to process orders, resources than we do. To the extent existing or future manage inventory and accounts receivable collections, competitors seek to gain or retain market share by purchase products, ship products to our customers on reducing prices, we may be required to lower our prices, a timely basis, maintain cost-effective operations and thereby adversely affecting financial results. Existing provide superior service to our customers. or future competitors also may seek to compete with us for acquisitions, which could have the effect of WESCO International’s controlling shareholders increasing the price and reducing the number of suitable own approximately 44% of its common stock and acquisitions. In addition, it is possible that competitive can exercise significant influence over our affairs. pressures resulting from the industry trend toward consolidation could affect growth and profit margins. Approximately 44% of the issued and outstanding shares of common stock of WESCO International is held by Loss of key suppliers or lack of product availability Cypress and its affiliates. Accordingly, Cypress and its could decrease sales and earnings. affiliates can exercise significant influence over our affairs, including the election of our directors, appoint- Most of our agreements with suppliers are terminable ment of our management and approval of actions by either party on 60 days’ notice or less. Our ten largest requiring the approval of our stockholders, including suppliers in 2002 accounted for approximately 33% of the adoption of amendments to our certificate of our purchases for the period. Our largest supplier was incorporation and approval of mergers or sales Eaton Corporation, through its Cutler-Hammer division, of substantially all of our assets. accounting for approximately 13% of our purchases. 20 / WESCO INTERNATIONAL, INC. 2002 Form 10-K